Regal Investment Fund (ASX: RF1)

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The Regal Investment Fund (RF1 or ‘the Trust’) is seeking to list on the Australian Stock
Exchange (ASX) on 17 June 2019 by raising between A$100m to a hard cap limit of $500m.
The Trust will be managed by Regal Funds Management Pty Ltd (the ‘Manager’), a specialist
funds manager of alternative investment strategies founded in 2004 with a superior trackrecord
in both bull and bear markets and with approximately $1.6 billion in funds under
management (FUM). The Trust will initially provide exposure to five diversified alternative
investment strategies managed by Regal (the ‘Underlying Strategies’). Specifically, the
expectation (subject to market conditions at the time of investment) is that the initial portfolio
will be allocated across the Regal Investment Strategies in accordance with the following:
50% Market Neutral Strategy; 12.5% Global Alpha Strategy; 12.5% Australian Long Short
Strategy; 12.5% Australian Small Companies Strategy, and; 12.5% Emerging Companies
Strategy. The relative weighting given each strategy may be tactically varied across the
market cycle, but any such reweightings are likely to be more tilts and a function of gross
leverage at the underlying strategy level more so than the dynamic reallocation of capital. The
theme that unites the Underlying Strategies, in addition to strong track-records and a firmwide
investment philosophy and process, is all represent relatively differentiated investment
strategies with a focus on absolute returns that together, have a low correlation to equity
markets. In short, the Trust will provide exposure to diversified alternative investment
strategies which: have a track record of generating superior absolute returns; allow access
to strategies not generally available to retail investors; provides diversification with low
correlation to equity markets; has the ability to tactically take advantage of volatile markets;
and is managed by one of Australia’s leading investment managers.
INVESTOR SUITABILITY
Investors should note long-short strategies are leveraged investment vehicles, and with that
comes increased risk / volatility and the potential for material downside risk. Historically,
all but one of the Underlying Strategies has exhibited greater volatility than the respective
benchmarks. With a 50% initial allocation, the Trust has been anchored around the Market
Neutral Strategy (beta zero). The rationale is to provide risk-adjusted returns attractive to
investors, without being cornered into equity markets given the strategy’s limited correlation.
This reflects a range of market dynamics combined with the Manager’s view. Specifically,
market volatility is rising, equity markets have been trending up for ten years and there are
several red flags about excessive valuations, the outlook for EPS growth of major Australian
listed companies is relatively poor, and many investment vehicles are highly correlated. By
blending the Market Neutral Strategy with a range of alternative strategies the Trust gains
equity market exposure but through strategies that have exhibited the correlation sought
from long/short strategies - positive correlation in rising markets and negative correlation
in falling markets. The mix of the strategies seeks to provide the risk mitigating benefits
of diversification by security, market capitalisation, sector, geography and style while the
ability to tactically reweight is designed to enable investors to benefit from where the Regal
investment team perceive the best opportunities across the cycle as well as providing a
convenient all-in-one alternative investment vehicle for retail investors.
RECOMMENDATION
IIR ascribes a “RECOMMENDED PLUS” rating to The Regal Investment Fund. The
Underlying Strategies have, without exception, track records of generating superior absolute
returns. The creation of RF1 has come after a period of Regal building out its capabilities over
recent years, with the team depth supporting the management of the multiple underlying
investment strategies as well as supporting a LIT investment vehicle. IIR view Regal as one
of the most experienced fund managers on short side investment, a view supported by a
performance track record of an asymmetry of alpha from shorts versus longs and returns true
to the absolute returns style. Our primary reservation is the high fees which characterise the
hedge fund sector.